Forward-Looking Statements:

When used in this Quarterly Report on Form 10-Q, the words "believes," "plans," "estimates," "anticipates," "expects," "intends," "allows," "can," "will" and similar expressions are intended to identify forward-looking statements. These statements relate to future periods and include, but are not limited to, statements as to: the features, benefits, capabilities, performance, impact and production of our products and technologies; product, manufacturing, design or software defects and the impact of such defects; defects in materials used to manufacture a product; causes of product defects; our reliance on third parties to manufacture, assemble and test our products; reliance on a limited number of customers and suppliers; new products or markets; design wins; our market position; our competition, sources of competition and our competitive position; our strategic relationships; average selling prices; seasonality; customer demand; growth; our international operations; our ability to attract and retain qualified personnel; our inventory; acquisitions and investments; stock options; the impact of stock-based compensation expense; our financial results; our tax positions; mix and sources of revenue; capital and operating expenditures; our cash; liquidity; our investment portfolio and marketable securities; our exchange rate risk; our stock repurchase program; our internal control over financial reporting; our disclosure controls and procedures; recent accounting pronouncements; our intellectual property; compliance with environmental laws and regulations; ongoing and potential litigation. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks discussed below as well as difficulties associated with: fluctuations in general economic conditions in the United States and worldwide; difficulties in entering new markets; slower than expected development of a new market; conducting international operations; slower than anticipated growth; forecasting customer demand; product, manufacturing, software and design defects; defects in product design or materials used to manufacture a product; supply constraints; the impact of competitive pricing pressures; unanticipated decreases in average selling prices; increased sales of lower margin products; international and political conditions; changes in international laws; fluctuations in the global credit market; fixed operating expenses; our inventory levels; fluctuations in investments and the securities market; changes in customers' purchasing behaviors; the concentration of sales of our products to a limited number of customers; decreases in demand for our products; delays in the development of new products by us or our partners; delays in volume production of our products; developments in and expenses related to litigation or regulatory actions; our inability to realize the benefits of acquisitions; and the matters set forth under Part II, Item 1A. - Risk Factors. These forward-looking statements speak only as of the date hereof. Except as required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

All references to "NVIDIA," "we," "us," "our" or the "Company" mean NVIDIA Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.

NVIDIA, GeForce, SLI, Hybrid SLI, GoForce, Quadro, NVIDIA Quadro, NVIDIA nForce, Tesla, Tegra, CUDA, NVIDIA APX, PhysX, Ageia, Mental Images, and the NVIDIA logo are our trademarks and/or registered trademarks in the United States and other countries that are used in this document. We may also refer to trademarks of other corporations and organizations in this document.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Item 6. Selected Financial Data" of our Annual Report on Form 10-K for the fiscal year ended January 27, 2008 and

Overview

Our Company

NVIDIA Corporation is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or the GPU. Our products are designed to generate realistic, interactive graphics on consumer and professional computing devices. We serve the entertainment and consumer market with our GeForce products, the professional design and visualization market with our Quadro products, and the high-performance computing market with our Tesla products. We have four major product-line operating segments: the GPU Business, the professional solutions business, or PSB, the media and communications processor, or MCP, business, and the consumer products business, or CPB.

Our GPU business is comprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, plus memory products. Our PSB is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products. Our MCP business is comprised of NVIDIA nForce core logic and motherboard GPU, or mGPU products. Our CPB is comprised of our Tegra and GoForce mobile brands and products that support handheld personal media players, or PMPs, personal digital assistants, or PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices. Original equipment manufacturers, original design manufacturers, add-in-card manufacturers, system builders and consumer electronics companies worldwide utilize our processors as a core component of their entertainment, business and professional solutions.

We were incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Our headquarter facilities are in Santa Clara, California. Our Internet address is www.nvidia.com. The contents of our website are not a part of this Form 10-Q.

Recent Developments, Future Objectives and Challenges

GPU Business

During the first nine months of fiscal year 2009, we launched several new GPUs in the GeForce family. The product launches included the GeForce 9600 GT, which provides more than double the performance of our previous GeForce 8600 GTS; the GeForce 9800 GX2, which provides a new dual GPU board featuring Quad SLI technology; and the GeForce 9800 GTX, which is a flexible GPU that supports both two-way and three-way Scalable Link Interface, or SLI, technology. Additionally, we also launched the GeForce 8800 GT, which is the first after-market consumer graphics card for the Mac Pro and is sold directly by us.

On February 10, 2008, we completed our acquisition of Ageia Technologies, Inc., or Ageia, an industry leader in gaming physics technology. Ageia's PhysX software is widely adopted in several PhysX-based games that are shipping or in development on Sony Playstation 3, Microsoft Xbox 360, Nintendo Wii, and gaming PCs. We believe that the combination of the GPU and physics engine brands will result in an enhanced visual experience for the gaming world.

During the second quarter of fiscal year 2009, we launched the GeForce GTX 280 and 260 GPUs. These products represent the second-generation of our unified architecture. Based on a comparison between the GeForce GTX 280 and the GeForce 8800 Ultra in a variety of benchmarks and resolutions, the GeForce GTX 280 and 260 GPUs deliver 50 percent more gaming performance over our previous GeForce 8800 Ultra GPU. We also launched the GeForce 9800 GTX+, GeForce 9800 GT, and GeForce 9500 GT GPUs that provide support for our PhysX physics engine and CUDA parallel processing across a wide range of price segments.

Professional Solutions Business

During the first quarter of fiscal year 2009, we launched the Quadro FX 3600M Professional, which is among the highest performing notebook GPUs.

In the second quarter of fiscal year 2009, we launched the Tesla C1060 computing processor and the S1070 computing system, which is among the first teraflop processors and has a 1U system with up to four teraflops of performance.

During the third quarter of fiscal year 2009, we launched five new Quadro FX notebook GPUs that spanned from ultra-high performance to ultra mobility. We also launched the first desk side visual supercomputer with the Quadro Plex D Series. At this year's SIGGRAPH 2008 conference, we set a new milestone in computer graphics by demonstrating the world's first real-time fully-interactive ray tracer on the new Quadro Plex D2 system. We also launched the NVIDIA Quadro CX, the industry's first accelerator for Adobe's Creative Suite 4, or Adobe CS4, content creation software. Adobe CS4 software has added optimization to take advantage of GPU technology. The Quadro CX is specifically designed to enhance the performance of the Adobe CS4 product line and to give creative professionals the ultimate performance and productivity.

MCP Business

During the first quarter of fiscal year 2009, we shipped Hybrid SLI DX10 mGPUs - the GeForce 8000 GPU series. The GeForce 8000 GPU series includes GeForce Boost Hybrid SLI technology, which is designed to double performance when paired with a GeForce 8 series desktop GPU. Additionally, we also launched the NVIDIA nForce 790i Ultra SLI MCP, which is one of the industry's highly rated overclockable platform for Intel processors.

During the second quarter of fiscal year 2009, we launched the GeForce 9M series of notebook GPUs that enables improved performance in notebooks with Hybrid SLI technology and PhysX technology. We also launched SLI for Intel Broomfield CPU platforms. When paired with the nForce 200 SLI MCP, Intel's Bloomfield CPU and Tylersburg core logic chipset will deliver NVIDIA three-way SLI technology with up to a 2.8 times performance boost over traditional single graphics card platforms.

During the third quarter of fiscal year 2009, we launched the GeForce 9400M mGPU along with Apple, Inc., or Apple, for their new lineup of Mac notebooks. The GeForce 9400M integrates three complex chips - the northbridge, the input-output network processor, and the GeForce GPU into a single chip and, as a result, significantly improves performance over Intel integrated graphics. Apple's MacBook and MacBook Air notebook computers come standard with the GeForce 9400M. Apple's MacBook Pro notebook computer comes standard with the hybrid combination of two GeForce GPUs - a GeForce 9400M for maximum battery life and a GeForce 9600M GT for high performance mode. We also launched the GeForce 9400 and 9300 mGPUs for Intel desktop PCs. These new mGPUs set a new price/performance standard for integrated graphics by combining the power of three different chips into one highly compact and efficient GPU.

Consumer Products Business

During the first nine months of fiscal year 2009, we launched the NVIDIA APX 2500 application processor. The Tegra APX 2500 is a computer-on-a-chip designed to meet the growing multimedia demands of today's mobile phone and entertainment user. We believe that the mobile application processor is an area where we can add a significant amount of value and we also believe it represents a revenue growth opportunity.

During the second quarter of fiscal year 2009, we launched the Tegra 600 and 650 that represent a single-chip heterogeneous computer architecture designed for low-power mobile computing devices.

Restructuring Charges

On September 18, 2008, we announced a workforce reduction to allow for continued investment in strategic growth areas, which was completed in the third quarter of fiscal year 2009. As a result, we eliminated approximately 360 positions worldwide, or about 6.5% of our global workforce. During the third quarter of fiscal year 2009, expenses associated with the workforce reduction, which were comprised primarily of severance and benefits payments to these employees, totaled $8.3 million. The remaining accrual of $0.8 million as of October 26, 2008 relates to severance and benefits payments, which are expected to be paid over the fourth quarter of fiscal year 2009. We anticipate that the expected decrease in operating expenses from this action will be offset by continued investment in strategic growth areas.

Product Defect

Our products are complex and may contain defects or experience failures due to any number of issues in design, fabrication, packaging, materials and/or use within a system. If any of our products or technologies contains a defect, compatibility issue or other error, we may have to invest additional research and development efforts to find and correct the issue. Such efforts could divert our management's and engineers' attention from the development of new products and technologies and could increase our operating costs and reduce our gross margin. In addition, an error or defect in new products or releases or related software drivers after commencement of commercial shipments could result in failure to achieve market acceptance or loss of design wins. Also, we may be required to reimburse customers, including for customers' costs to repair or replace the products in the field, which could cause our revenue to decline. A product recall or a significant number of product returns could be expensive, damage our reputation and could result in the shifting of business to our competitors. Costs associated with correcting defects, errors, bugs or other issues could be significant and could materially harm our financial results.

In July 2008, we recorded a $196.0 million charge against cost of revenue to cover anticipated customer warranty, repair, return, replacement and other associated costs arising from a weak die/packaging material set in certain versions of our previous generation MCP and GPU products used in notebook systems. All of our newly manufactured products and all of our products that are currently shipping in volume have a different material set that we believe is more robust.

The previous generation MCP and GPU products that are impacted were included in a number of notebook products that were shipped and sold in significant quantities. Certain notebook configurations of these MCP and GPU products are failing in the field at higher than normal rates. While we have not been able to determine a root cause for these failures, testing suggests a weak material set of die/package combination, system thermal management designs, and customer use patterns are contributing factors. We have worked with our customers to develop and have made available for download a software driver to cause the system fan to begin operation at the powering up of the system and reduce the thermal stress on these chips. We have also recommended to our customers that they consider changing the thermal management of the MCP and GPU products in their notebook system designs. We intend to fully support our customers in their repair and replacement of these impacted MCP and GPU products that fail, and their other efforts to mitigate the consequences of these failures.

We continue to engage in discussions with our supply chain regarding reimbursement to us for some or all of the costs we have incurred and may incur in the future relating to the weak material set. We also continue to seek to access our insurance coverage. However, there can be no assurance that we will recover any such reimbursement. We continue to not see any abnormal failure rates in any systems using NVIDIA products other than certain notebook configurations. However, we are continuing to test and otherwise investigate other products. There can be no assurance that we will not discover defects in other MCP or GPU products.

In September, October and November 2008, several putative class action lawsuits were filed against us, asserting various claims related to the impacted MCP and GPU products. Please refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for further information regarding this litigation.

Dependence on PC market

We derive and expect to continue to derive the majority of our revenue from the sale or license of products for use in the desktop PC and notebook PC markets, including professional workstations. A reduction in sales of PCs, or a reduction in the growth rate of PC sales, may reduce demand for our products. For the first nine months of fiscal year 2009, sales of our desktop GPU and memory products decreased approximately 11% and 53%, respectively, as compared to the first nine months of fiscal year 2008. Changes in demand for our products could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they incorrectly forecast product transitions. In these cases, PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers like us until their excess inventory has been absorbed, which would have a negative impact on our financial results.

Seasonality

Historically, we have seen stronger revenue in the second half of our fiscal year than in the first half of our fiscal year, primarily due to back-to-school and holiday demand. While our revenue has generally followed this seasonal trend, there can be no assurance that this trend will continue. Our revenue outlook for the fourth quarter of fiscal year 2009 includes a wider than typical range due to the uncertainty regarding how the current economic environment will impact our business. We expect revenue to decline slightly during the fourth quarter of fiscal year 2009 as compared to the third quarter of fiscal year 2009.

Financial Information by Business Segment and Geographic Data

Our Chief Executive Officer, who is considered to be our chief operating decision maker, or CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.

We report financial information for four operating segments to our CODM: the GPU business, which is comprised primarily of our GeForce products that support desktop and notebook personal computers, or PCs, plus memory products; the PSB, which is comprised of our NVIDIA Quadro professional workstation products and other professional graphics products, including our NVIDIA Tesla high-performance computing products; the MCP business which is comprised of NVIDIA nForce core logic and mGPU products; and our CPB, which is comprised of our Tegra and GoForce mobile brands and products that support handheld PMPs, PDAs, cellular phones and other handheld devices. CPB also includes license, royalty, other revenue and associated costs related to video game consoles and other digital consumer electronics devices.

In addition to these operating segments, we have the "All Other" category that includes human resources, legal, finance, general administration, restructuring charges and corporate marketing expenses, which total $88.5 million and $66.2 million for third quarter of fiscal years 2009 and 2008, respectively, and total $245.4 million and $197.0 million for the first nine months of fiscal years 2009 and 2008, respectively, that we do not allocate to our other operating segments as these expenses are not included in the segment operating performance measures evaluated by our CODM. "All Other" also includes the results of operations of other miscellaneous reporting segments that are neither individually reportable, nor aggregated with another operating segment. Revenue in the "All Other" category is primarily derived from sales of components.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our
consolidated statements of operations expressed as a percentage of revenue.

                                                        Three Months Ended            Nine Months Ended
                                                     October 26,    October 28,   October 26,   October 28,
                                                        2008           2007          2008          2007
Revenue                                                     100.0 %       100.0 %       100.0 %       100.0 %
Cost of revenue                                              59.0          53.8          64.9          54.4
Gross profit                                                 41.0          46.2          35.1          45.6
Operating expenses:
Research and development                                     23.7          16.1          21.9          17.1
Sales, general and administrative                            10.1           7.9           9.4           8.6
Restructuring charges                                         0.9             -           0.3             -
Total operating expenses                                     34.7          24.0          31.6          25.7
Operating income                                              6.3          22.2           3.5          19.9
Interest and other income, net                                0.5           1.7           0.8           1.6
Income before income tax expense (benefit)                    6.8          23.9           4.3          21.5
Income tax expense (benefit)                                 (0.1 )         2.8           0.3           2.8
Net income                                                    6.9 %        21.1 %         4.0 %        18.7 %

Three and nine months ended October 26, 2008 and October 28, 2007

Revenue

Revenue was $897.7 million for our third quarter of fiscal year 2009, compared to $1.12 billion for our third quarter of fiscal year 2008, which represents a decrease of 20%. Revenue was $2.94 billion for the first nine months of fiscal year 2009 and $2.90 billion for the first nine months of fiscal year 2008, which represented an increase of 2%. We expect revenue to decline slightly during the fourth quarter of fiscal year 2009 as compared to the third quarter of fiscal year 2009. A discussion of our revenue results for each of our operating segments is as follows:

GPU Business. GPU Business revenue decreased by 33% to $461.5 million in the third quarter of fiscal year 2009, compared to $689.9 million for the third quarter of fiscal year 2008. This decrease was primarily due to decreased sales of our desktop GPU and memory products. Sales of our desktop GPU and memory products decreased by approximately 42% and 61%, respectively, compared to the third quarter of fiscal year 2008. These decreases were primarily due to a decline in the Standalone Desktop market segment as reported in the PC Graphics October 2008 Report from Mercury Research, driven by a combination of market migration from desktop PCs towards notebook PCs and an overall market shift in the mix of products towards lower priced products. The decline in revenue during the third quarter of fiscal year 2009 also reflects the impact of average sales price regression we experienced in our desktop GPU products as a result of increased competition. In addition, a decline in our share position caused by increased competition, as also reported in the PC Graphics October 2008 Report from Mercury Research, also contributed to the decrease in our desktop GPU revenue. Sales of our NVIDIA notebook GPU products in the third quarter of fiscal year 2009 decreased by 2% when compared to the third quarter of fiscal year 2008, as higher unit sales aided by the market move toward notebook PCs were offset by lower average sales prices in the third quarter of fiscal year 2009 when compared to the third quarter of fiscal year 2008.

GPU Business revenue decreased by 5% to $1.67 billion for the first nine months of fiscal year 2009 compared to $1.75 billion for the first nine months of fiscal year 2008. This decrease was primarily due to decreased sales of our desktop GPU and memory products, offset by increased sales of our notebook GPU products. Sales of our desktop GPU and memory products decreased approximately 11% and 53%, respectively, as compared to the first nine months of fiscal year 2008. These decreases were primarily due to a decline in the Standalone Desktop market segment as reported in the PC Graphics October 2008 Report from Mercury Research, driven by a combination of market migration from desktop PCs towards notebook PCs and an overall market shift in the mix of products towards lower priced products. The decline in revenue during the first nine months of fiscal year 2009 also reflects the impact of average sales price regression we experienced in our desktop GPU products as a result of increased competition. In addition, a decline in our share position caused by increased competition, as also reported in the PC Graphics October 2008 Report from Mercury Research, also contributed to the decrease in our desktop GPU revenue. Sales of our NVIDIA notebook GPU products increased approximately 34% when compared to the first nine months of fiscal year 2008, due primarily to higher unit sales aided by the market move toward notebook PCs over desktop PCs.

PSB. PSB revenue increased by 31% to $199.3 million in the third quarter of fiscal year 2009, compared to $152.2 million for the third quarter of fiscal year 2008. PSB revenue increased by 39% to $582.4 million for the first nine months of fiscal year 2009 as compared to $420.4 million for the first nine months of fiscal year 2008. Our NVIDIA professional workstation product sales increased due to an overall increase in shipments of boards and chips as compared to the third quarter and first nine months of fiscal year 2008 due to strong demand and our transition from previous generations of NVIDIA Quadro professional workstation products to GeForce 8-based and GeForce 9-based products. Sales of NVIDIA Quadro CX for Adobe's CS4 software, which we launched in the third quarter of fiscal year 2009, also contributed towards the increase in sales in the third quarter and first nine months of fiscal year 2009.

MCP Business. MCP Business revenue of $197.6 million in the third quarter of fiscal year 2009 was relatively flat when compared to revenue of $198.2 million for the third quarter of fiscal year 2008. A decrease in sales of our AMD-based platform products was offset by an increase in sales of our Intel-based platform products as compared to the third quarter of fiscal year 2008.

MCP Business revenue increased by 10% to $559.4 million for the first nine months of fiscal year 2009 as compared to $508.0 million for first nine months of fiscal year 2008. The increase was a result of an approximately 230% increase in sales of our Intel-based platform products while sales of our AMD-based platform products decreased by 19% as compared to the first nine months of fiscal year 2008.

CPB. CPB revenue decreased by 48% to $34.2 million for the third quarter of fiscal year 2009, compared to $65.9 million for the third quarter of fiscal year 2008. CPB revenue decreased by 43% to $111.3 million for the first nine months of fiscal year 2009 as compared to $195.3 million for the first nine months of fiscal year 2008. The decline in CPB revenue is primarily driven by a . . .